Crude oil futures were sharply lower in mid-morning trade in Asia Jan. 21, plunging from 7-year highs reached earlier this week as investors rushed to book profits after a multi-week rally that had finally run out of steam.
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Register NowAt 10:18 am Singapore time (0218 GMT), the ICE March Brent futures contract was down $1.83/b (2.07%) from the previous close at $86.22/b, while the NYMEX March light sweet crude contract fell $1.94/b(2.23%) at $83.60/b.
After gaining more than 20% in value over a 5-week rally that saw it touch highs not seen since October 2014, analysts said oil prices looked increasingly ripe for profit-taking and were prone to a correction at some point.
"It could be that the oil complex is finally catching the cold from the broader financial markets. Investors nervous over impending US rate hikes and the economic impact of the omicron have been selling off stocks this week," Vandana Hari, CEO of Vanda Insights, said.
"At the same time, the fear premium injected into crude earlier this week on account of the Iraq-Turkey pipeline outage and the Houthi attacks on the UAE would also be receding," Hari added.
Equity markets have been in freefall in recent days, with the tech-heavy Nasdaq index officially falling into correction territory Jan. 19, as increasing signs of a sharp tightening in monetary policy from the US Federal Reserve saw investors retreating from rate-sensitive assets.
Most analysts now expect four rate hikes from the Fed this year, with some calling for as much as eight hikes before the year is over.
Fears over tightening supply, meanwhile, has been easing in recent days as disruptions in Kazakhstan and Libya, as well as explosions to a pipeline carrying oil from Northern Iraq to the Mediterranean port of Ceyhan, were fixed.
In the US, most recent Energy Information Administration data showed commercial crude stocks climbed 520,000 barrels to 413.81 million barrels in the week ended Jan. 14. Total US gasoline stocks rose 5.87 million barrels over the same period to 246.62 million barrels, while distillate stocks declined 1.43 million barrels to 127.95 million barrels, the EIA said.
Despite the recent decline, analysts expect the longer-term direction for crude oil prices to be upward, as a continued recovery in oil demand and failure by several OPEC members to boost output means that the oil market will remain tight for some time.
"The rally in crude oil took a breather after US crude stockpiles rose modestly... The pause in prices was also driven by reports the US is planning to accelerate the release of strategic reserves. However, this will be overshadowed by ongoing supply constrains globally," ANZ Research analysts said in a Jan. 21 note.
"Crude may see as much volatility on the way down as it did on the way up. There's just too many short-term fundamental and geopolitical factors in the mix," Hari said.